An important type of pricing program used primarily by retailers is the loss leader. Under this method, a product is intentionally sold at or below the cost the retailer pays to acquire the product from suppliers. The idea is that offering such a low price will entice a high level of customer traffic to visit a retailer’s store or e-commerce website. The expectation is that customers will easily make up for the profit lost on the loss leader item by purchasing other items that are not following loss leader pricing. For instance, many convenience stores, that also provide gasoline, may use gas pricing as a loss leader. Their hope is that the low price, which is often displayed on large roadside signage, will generate traffic to the inside of their store, where customers will purchase regularly priced products, such as food and drinks.
Marketers should be aware that some governmental agencies view loss leaders as a form of predatory pricing and, therefore, consider it illegal. Predatory pricing occurs when an organization is deliberately selling products at or below cost with the intention of driving competitors out of business. Of course, this differs from our discussion, in which loss leader pricing is considered a form of promotion and not a form of anti-competitive activity.
In the U.S., several state governments have passed laws under the heading Unfair Sales Act (sometimes referred to as the Minimum Markup Law), which prohibit the selling of certain products below cost. The main intention of these laws is to protect small firms from below-cost pricing activities of larger companies. States that enforce such laws primarily do so for specific product categories, such as gasoline and tobacco.